Shesa's MARCH 2018 INVESTMENT BLOG

                  Mar 18, 2018

MARCH 2018 INVESTMENT BLOG

Shesa Nayak

THANKS to all my blog readers for showing enthusiasm to read my blog since last 6 years! I always do my due diligence to make sure that your time is valued.  I will be delighted, if I can make any value addition to meet your investment objectives! This month I have made little change to my blog site. Now you can see the Archive by clicking on the top left. Also, you can search any content that you want to see in my blog. Hope it helps! All your suggestions are welcomed and appreciated.

U.S. Stock Market Update: After the tremor that we saw in the stock market during February, stock markets have consolidated to some extent.  It looks like the market is trying to form a trading range. The only exception is NASDAQ which has been making new highs. Investors money keeps rotating to technology sector.  Meanwhile, Q4 earnings are over and stock markets have to focus on other economy news. You may be aware that, President Donald Trump signed two proclamations a couple of weeks ago levying tariffs on aluminum and steel imports. The Trump administration’s firing key officials continues unabated. Federal Reserve meets on March 20-21 to determine the next move on interest rate. It’s mostly anticipated that it will raise 0.25% interest rate in March. There are further anticipations that Fed will hike interest rate at least 3 times or may be 4 times during 2018. This is making the stock market little nervous. This month I will do an impact analysis of Donald Trump’s tax cut and its impact on U.S economy and Stock Market. We can discuss more on this but let’s first look at the stock market indexes.

U.S STOCK MARKET INDEX

Indexes	1/2/18	Friday Close (2/9/18	Change in 2018	% Change in 2018
DOW Jones	24,719.22	24,946.51	227.29	0.92
S&P 500	2,673.61	2,752.01	78.40	2.93
NASDAQ	6,903.39	7,481.99	578.60	8.38
BTK (Biotech)	4,222.21	4,792.11	569.90	13.50
NBI	3,356.61	3,544.03	187.42	5.58

Key Economy news

Employment: The U.S. economy continues its healthier trend. It added 313,000 jobs last month significantly higher than analysts’ estimation of 205,000. February’s number marks the biggest monthly gain since October 2015. The unemployment rate remained at 4.1%. According to Investors’ Business Daily 653,000 people rejoined the labor force in February, the biggest monthly increase in more than a decade.

GDP: The U.S. economy experienced 3 consecutive quarters averaged better than 3% GDP growth. That’s the best performance in more than a decade.

Tariff: President Donald Trump signed two proclamations a couple of weeks ago levying tariffs on aluminum and steel imports, 25% duty on steel and 10% on aluminum, Mexico and Canada were being exempted.

 Consumer confidence and spending: Commerce department said U.S. retail sales unexpectedly fell in February for a third month. Retail Sales fell 0.1% vs. estimated up 0.3%. Obviously, we can't anticipate consumers to keep spending heavily each month. I think this could be due to off season and modest wage growth.

For more U.S. Economic news and data please look at here: http://www.marketwatch.com/economy-politics/calendars/economic   

Source: Marketwatch.com

Are we at the end of Bull Market?

Many people keep asking me whether we are at the end of bull market? Are we going to have correction? Will there be recession? Frankly speaking, nobody knows the answer and those pundits who calls for market top or bottom have their own interest to make the individual investors panicked or pour money. My take is why bother on something based on speculation? It’s always better to have Plan A and Plan B for best case scenario and worst-case scenario. As long as you know the objective of buying a specific equity, you can plan to keep it or liquidate it. In worst case, if bull market turns out to be bear market then one has to quickly decide the next course of action. In my view, the market correction that we saw in early February was NOT the start of a bear market. All the stock indexes have bounced back, and NASDAQ has made a new high. Such pull backs are healthy for the market as new money waiting on the sidelines have the opportunities to get in. The only concern is, the way market correction took place seems to be a coordinated and planned effort by the big institutions. How many times have we heard big institutions losing money? Probably, the only exception was “Bear Stern” collapse in 2008 which caused havoc in the stock market followed by many other bankruptcies. In my February blog I discussed all the factors on why it happened.

The economy is still STRONG:

·   Corporate earnings are best in 10 years and Positive earnings revisions are on a record pace.

·    Analysts are looking for 19% earnings growth this year attributed to corporate tax cuts.

·  The economy is healthy and growing. Unemployment is low. Personal income is up. Consumer spending and business confidence is high.

Hence, the correction was obviously not the start of a bear market rather an opportunity to buy.

With all the above good news, a few things have changed though.

Market Volatility has increased and expect the market to continue to be volatile going forward.

Saturating Bull Market that started in 2009.

Money will continue to rotate into stronger sectors and possibly fundamentally good equities. Hence, it’s better to follow the money.

It can be noted that, about 50% of the S&P 500 is still in a correction, with their prices down 10% or more. It’s better to exit from some of the weak stocks as and when opportunities arise. I can still see enormous good biotech companies are down significantly from their top. 

Impact Analysis of Tax Cut on Stock Market

I discussed some of these factors in my last month’s blog about it. But I am going to do a detailed analysis this month because it will have significant impact on the stock market. Let’s see..

Where will the Corporates deploy their money derived from Tax Cut?

As we know, the new tax law slashed the corporate tax rate from 35% to 21%. According to CreditSuissie there are about $2.6 TRILLION cash sitting abroad by U.S Corporations. Let’s first take a look of the Companies with highest cash sitting abroad.

COMPANY	CASH OVERSEES	TOTAL CASH
Apple Inc	$252,300	$268,895
Microsoft Corp	$127,900	$132,981
Cisco Systems Inc	$67,500	$76,089
Oracle Corp	$54,400	$66,078
Alphabet Inc	$52,200	$90,511
Johnson & Johnson	$41,300	$43,116
Amgen Inc	$35,900	$38,239
Gilead Sciences Inc	$27,400	$32,380
Pfizer Inc	$22,469	$24,966
Merck & Co	$21,893	$25,757
Coca-Cola Co	$20,200	$24,405
Pepsico Inc	$15,200	$16,230
Procter & Gamble Co	$15,000	$15,269
Intel Corp	$13,600	$31,392
Priceline Group Inc	$12,600	$13,900
Lilly (Eli) & Co	$9,770	$11,246
Visa Inc	$8,700	$14,693
Amazon.Com Inc	$8,600	$25,981
Ebay Inc	$8,200	$11,118
United Technologies Corp	$8,059	$9,481
Bristol-Myers Squibb Co	$8,000	$9,093
Honeywell International Inc	$7,962	$8,847
Abbvie Inc	$7,385	$8,206
HP Inc	$7,136	$7,929
Western Digital Corp	$6,900	$9,195
Abbott Laboratories	$6,854	$8,064
Intl Business Machines Corp	$6,406	$7,118
Celgene Corp	$6,113	$7,970
Du Pont (E I) De Nemours	$5,800	$5,967
Biogen Inc	$5,500	$7,824

Note: Biotech Stocks are highlighted.

Source: CreditSuisse.

The new tax law holiday approved by Trump administration lets companies bring back their cash at 15.5% tax rate. As said earlier, $2.6 trillion sitting overseas, that’s potentially a $400 billion will go to uncle Sam (FED). The remaining will be spent by the companies. So, the main question comes to mind is, where will those tax saving money go? The so-called market pundits say money back will help fuel investment and create millions of jobs. But I do NOT buy that argument. Why is that?

• If you recall, in 2004, President George W Bush had a big tax cuts and congress created a tax holiday wherein companies were allowed to bring their cash back at an effective tax rate of only 3.7%. That helped U.S corporates to bring $362 billion back to the U.S. But did that money go to creating jobs, increasing wages, R&D, Capital Spending? The answer is mostly “NO”.  Based on the studies by National Bureau of Economic Research, those money were spent to pay dividends and buyback their own shares. Agreed, some companies recently announced to increase minimum wage, bonuses etc. but those are “fraction from the ocean of water”.  
• Based on the research by Morgan Stanley, let’s see how the oversees cash will be spent by the companies:

Where will Cash be Deployed?	% Of Cash
Share Buybacks and Dividends	42.9%
Mergers & Acquisitions	18.6%
Capital Spending	17.3%
Labor Compensation	13.2%
Balance-sheet Repair	8.0%
TOTAL	100%

• Based on the research from Accountingtoday.com, major corporations have authorized $200 billion in share buybacks in the two months since the passage of the new tax law. In contrast, more than 55,000 American workers have been laid off, according to Senate Democrats. These big buyback announcements we’ve already seen are likely just the beginning of the show. Bank of America forecasts a $450 billion buyback boom, thanks to Trump’s tax reform!

But another question comes to mind is, why do the companies’ buyback their own shares?

When the companies feel that their shares are cheap buys back own shares. Hence the stock price does not come down significantly and it sets a floor.

Second, it reduces the number of shares available resulting in higher Earnings Per Share (EPS) and lower P/E (Price-to-Earnings). It makes the stock look even cheaper and attractive to investors. Subsequently, more and more investors pour more money into the stocks, sending the share price higher.

Final thoughts on Stock Market: Visualizing strong economy, better earnings, shares buy backs, mergers & acquisitions, I do not think stock market will have major downturn until Q1 earnings are declared during April/May 2018. If the earnings do not come as anticipated or other significant micro-macro economy or political situation changes market will be volatile and trade within certain range. If there is any aberration on the above, then we can see some market pull back or corrections. Please note that we will be entering to the worst six months of the year starting MAY. Hence, it’s better to be vigilant and plan accordingly.

Is it worth investing in Emerging Market – China & India now?

In 2017, China had a GDP growth rate of 6.8% ahead of India’s GDP growth of 6.7%. Based on the IMF’s January 2018 update, India is projected to grow its GDP at 7.4% in 2018 and 7.8% in 2019. China is projected to grow its GDP 6.8% and 6.4% respectively. If that happens, it will make India the fastest growing economy among emerging economies. It could be noted that, demonetization and implementation of goods and services tax (GST) had slowed down India’s GDP growth for a few quarter. If you recall, I had indicated this in my blog that India’s GDP growth will return to pace in 2018.

So, looking ahead, which country has better investment opportunity? Despite comparable GDP growth, in my view Chinese ADRs companies listed in U.S stock exchanges like Alibaba (BABA), BIDU, JD.com, Tencent, Weibo, NTES, VIPS etc. have rewarded investors handsomely.  I still visualize that there is terrific growth potential still exists with these good Chines companies. Also, not to forget that China is the 2^nd largest economy in the world.

As far as India is concerned, GDP growth is better than China, but I still do not see that kind of growth potential and ROI. Also, I feel that there are lot of improvements required for many Indian corporates and bring more professionalism. For example, I had included ICICI bank in my blog portfolio a couple of years ago. As far as bank is concerned, it’s a reasonable private sector bank. But off late, its service has been deteriorating. It has been nightmare dealing with its subsidiaries like ICICI Prulife. I have personally gone through horrific experiences and probably never ever invest my money in such type of companies. I will keep myself miles away from such financial institutions. Hence, I will be more comfortable investing good Chinese ADR stocks having solid fundamentals, great return on investment. Having said that, there are some great companies in India too. But I will be very diligent and careful dealing with the investment in India. I will rather prefer investing there through good ETF and Mutual Fund or company with ADR having strong fundamental and professionalism.

Bottom line: As an investor, one has to be extremely careful and diligent investing hard-earned money, otherwise it does not matter whether GDP growth is 1% or 20%, one can be destined to lose money.

Invest in Exchange Traded Fund (ETF) or MUTUAL FUND?

Many people keep asking me this question. So, let me share my thoughts. As an investor one should be open for both. There are certain great Mutual Funds for which there are still no ETF. However, I will suggest having more weightage on ETF rather than Mutual Fund. Mutual Fund comprises of several good companies in their holding and same goes with ETF. But why do I prefer ETF?

• ETF are cheaper unless you buy a MF which has no Transaction fees. You can buy ETF buy just like a stock. There is no minimum limit. You can even buy only 1 stock (ETF).
• ETF have no minimum investment, front-end charges or early redemption fees.
• ETF holds selective top companies in their portfolio like Mutual Fund and fees charged is pretty less comparing to Mutual Fund.
• ETF offers real-time tracking and trading. Mutual fund order should be placed during stock market hour but will be executed only after market is closed. However, you can buy or sell ETF at any time just like stock even during extended hour.
• ETF have less turnover and hence they amass far fewer capital gains than an actively managed mutual fund.
• ETF are more transparent as you can verify your positions mostly on a daily basis whereas mutual funds are only required to disclose their portfolios on a quarterly basis.

Now let’s discuss this month’s inclusion into my blog portfolio.

This month’s Blog Portfolio

Berkshire Hathaway Inc. (BRK-B)

As many of you may be aware Berkshire Hathaway Inc. is run by the great Warren Buffett.  BRK-B through its subsidiaries engages in insurance, freight rail transportation, utility, railroad, distribute electricity, distribute natural gas, real estate brokerage service, housing, finance, leasing and so many other services. You can imagine how well diversified business it has. 

To give a perspective, Warren Buffett has given 19.1% average return on equity for his 53 years of running the company. Since 1964 through 2016, Berkshire's compounded annual gain is 20.8%. That's more than twice the annual gain of the S&P 500 index during that period. The overall gain generated by Berkshire stock was a mind-blowing 1,972,595%. If any example is given about investment, then we all talk about Warren Buffet as the investment “guru” – widely considered to be one of the greatest investor of all time. Do I need to say more? We know what he does but implementing his strategy is altogether a different ball game. Evidently, not everybody can be Warrant Buffett, that’s why he is known as “Oracle of Omaha”. Does it mean that Berkshire stock has always beaten S&P 500. The answer is “NO”.  In fact, the stock underperformed the S&P 500 index in 2011 and 2015 and just edged the S&P 500's gains in 2013. So far this year, it seems to be at par with other major indexes. Buffett has many principles for buying stocks. I have discussed this in my blogs a few years ago. Also, we discussed some of his principles during our investment meets. To highlight a few of his strategies:

• Buffett invests over long haul after doing significant amount of research. The stock market can be volatile, but what's important is how a stock performs over the long run. However, it’s not that he succeeded in all of his investments. He failed with some of the companies like: Tesco, Dexter shoe, ConcoPhillips, Lubrizol Corp, US Airways, over estimating manufacturing, Service and Retail investment and so on. He also regretted not realizing the potential to buy AMAZON and GOOGLE. Bottom line is, NOBODY on the planet can succeed in every investment irrespective of their expertise and experience. There will be some failure but it’s better to learn lesson(s) and not to repeat the same mistakes in future.
• Buffett invests in companies with solid fundamentals and dividends which can exist for decades.
• He invests when other gets scared and run away.
• Mostly, he does not invest in technology though recently he invested in AAPL and IBM. He says, he does not understand technology, hence he does not invest in something that he does not understandJ.
• Investing using Buffett’s principle does not necessarily mean guaranteed success. Individual investor(s) like us do not have billions to put to work. Just to give a perspective, Berkshire Hathaway gained $29 billion in December when Trump administration changed the Tax Code as the new law cut the corporate income tax rate to 21% from 35%. 

Important Holdings of Buffett: Apple, American Express, Bank of America, CocaCola, The Kraft Heinz, Wells Fargo, US Bank etc. He has invested 42.6% in Financials, 23.4% in Consumer defensive, 15.6% in Technology and rest in other sectors.

Let’s fist see the fundamentals of BRK-B.

Market Cap	510.8B	52 Week High	217.62
Trailing PE	11.36	52 Week Low	160.93
Forward PE	20.97	Total Cash	106.88B
Price to Sales	2.13	Total Debt	102.59B
Revenue / Sales	239.29B	Book Value	211,992
Quarterly Revenue Growth	4.10%	Beta	0.86
Profit / Earnings	44.94B	Institutional holders	N/A
Quarterly Earnings Growth	417.80%	Return on Equity	14.23%
EPS	18.22

From the above fundamentals if we see the Future P/E ratio then the stock is not cheap. Moreover, if we see the Price to sales and earnings growth then it’s still a cheap stock. But let’s not forget that the company got $26 Billion from uncle Sam as tax savings after the recent tax cut. In 2017, Berkshire saw its net worth grow $65.3 billion, boosting its per share book value by 23%, according to Buffett's letter, published on February 24.

Why do I own this stock? I have already told about the performance above, I guess that’s one of the most important reason to have this stock in the portfolio. It’s better to put money on a stock that has amazing track record. It’s difficult to imagine a portfolio not having BRK-B or BRK-A on the portfolio. But for an individual investor owning BRK-A is difficult since each share cost $310,630. Hence BRK-B is the stock to own. I already own this stock and keep accumulating over a period of time. BRK-B is a stock to be owned for now and for generations to come. One should not trade such stock rather “invest on such stock” for a long period of time. If anybody wants to trade, then obviously this is not a stock to be owned.

Risks: If stock market goes down so also BRK-B will go down but possibly less than market volatility. Also, Warren Buffet is 87 years old. If something happens to him the stock may take a short-term dive. It may not be a major setback as he already has his backup but it’s difficult to replace Warren Buffett the genius.

Shesa’s Blog Portfolio (As of 3/25/18)

Equity	Suggested Price	Current Price	Suggested Date	% Change	My View (see disclaimer)
STOCK (All prices are in USD)
AAPL	51.63	178.02	1/25/13	245%	BUY below $170.
BIDU	86.43	262.39	4/18/13	204%	HOLD
FB	47	185.09	11/13/13	294%	HOLD
TSLA	135	321.35	11/13/13	138%	HOLD
MA	77.18	182.55	12/12/13	137%	HOLD
AMZN	311.73	1571.68	4/12/14	404%	HOLD
MO	50.05	63.19	9/13/15	26%	HOLD
BABA	67.28	200.28	2/21/16	198%	BUY
JD	23.45	44.97	5/22/16	92%	HOLD
XON	26.37	17.1	7/4/16	-35%	BUY
LUV	36.89	60.9	9/5/16	65%	HOLD
RIO	36.41	52.58	12/18/16	44%	BUY on dip
PVH	92.82	143.77	1/22/17	55%	HOLD
JUNO	23.13	87	2/19/17	276%	Bought by CELG @$87
EXEL	26.33	24.64	8/20/17	-6%	BUY
MOMO	32.14	37.2	11/25/17	16%	BUY on dip
CELG	104.36	89.61	1/1/18	-14%	BUY
ETF
GDX	26.88	21.43	4/1/13	-20%	HOLD
INDA	31.94	35.92	3/15/15	12%	HOLD
INCO	34.46	45.56	5/15/15	32%	Accumulate
IHF	139.1	163.5	8/16/15	18%	Buy on dip.
XLY	77.76	105.18	8/16/15	35%	HOLD
EEM	32.3	49.21	11/15/15	52%	Accumulate
IYG	112.03	138.17	3/19/16	23%	Buy on dip.
EMQQ	32.65	42.58	5/21/17	30%	Buy on dip.
KWEB	58.52	67.03	2/11/18	15%	BUY
BRK-B	206.96	206.96	3/18/18	0%	NEW ADDITION
MUTUAL FUND
FBIOX	114.64	242.56	3/1/13	112%	Accumulate
PRHSX *	47.25	74.72	2/2/14	58%	Accumulate
FSCHX *	120.74	175	4/12/14	45%	Accumulate
FSCRX *	24.3	30.46	10/25/14	25%	HOLD
PRMTX	59.45	106.35	12/20/14	79%	Accumulate
MINDX	26	33.25	6/14/15	28%	HOLD
MCDFX	12.37	18.63	12/9/15	51%	HOLD
FSRPX *	90.53	144.91	1/15/16	60%	Accumulate
FBSOX *	37.32	60.45	3/20/16	62%	Accumulate
FSMEX	43.66	47.57	9/24/17	9%	HOLD
* Indicates dividend adjusted

Positions closed in 2017: NONE

That’s all for today. Wish you great investing! Stay tuned for my APRIL 2018 blog. Thanks for your time. If you want to get alert on my action, then please subscribe to shesagroup_invest@googlegroups.com. Also, feel free to send me your comments and suggestions or alert request to shesa.nayak@gmail.com. You can also join my WhatsApp group, if interested.

Disclaimer: This blog is meant to provide my opinion only. The information provided is to the best of my knowledge but may not be accurate. I do not provide any professional recommendation to buy/sell any stock, ETF, mutual fund, or any other security(s). As an investor, it’s your hard-earned money and you decide what is best for you. The above are merely my own opinions and some of the information provided may not be accurate. Please contact a professional money manager to buy/sell any security. I do not earn any commission by writing the blog. I have position(s) on whatever security I write on my blog and avoid recommending any security that I do not own or follow. Anybody buying or selling the equities mentioned here would do it on their own risk.

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